Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 29 Oct 2017 My Price 5.00

Equity Valuation

Equity Valuation Most corporations pay semi-annual rather than annual dividends on their equity. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year, and then pays this dividend out in equal biannual instalments to its shareholders.

a. Suppose a company currently pays a €3.00 annual dividend on its equity in a single annual instalment, and management plans on raising this dividend by 6 per cent per year indefinitely. If the required return on this equity is 14 per cent, what is the current share price?

b. Now suppose that the company in (a) actually pays its annual dividend in equal six-monthly instalments: thus this company has just paid a £1.50 dividend per share, as it has in the previous six months. What is the current share price now? (Hint: Find the equivalent annual end-of-year dividend for each year.) Comment on whether you think that this model of share valuation is appropriate.

Answers

Maurice Tutor
(5)
Status NEW Posted 29 Oct 2017 08:10 AM My Price 5.00

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